EX-99.1 2 ex99_1.htm INTERIM FINANCIAL STATEMENTS ex99_1.htm  

Exhibit 99.1
 
 
 
Graphic
 
 

 







INTERIM CONSOLIDATED FINANCIAL STATEMENTS


JULY 29, 2009
 
 
 
 
 
 
 

   
 
       
Talisman Energy Inc.
 
Consolidated Balance Sheets
 
(unaudited)
 
             
   
June 30
   
December 31
 
(millions of C$)
 
2009
   
2008
 
         
(restated -
 
Assets
       
note 2)
 
Current
           
   Cash and cash equivalents (note 15)
    2,307       91  
   Accounts receivable
    1,588       2,424  
   Inventories
    120       181  
   Prepaid expenses
    19       17  
   Assets of discontinued operations (note 2)
    18       215  
      4,052       2,928  
                 
Other assets (note 4)
    220       234  
Goodwill  (note 3)
    1,291       1,260  
Property, plant and equipment
    19,334       18,984  
Assets of discontinued operations  (note 2)
    140       869  
      20,985       21,347  
Total assets
    25,037       24,275  
                 
Liabilities
               
Current
               
   Bank indebtedness
    2       81  
   Accounts payable and accrued liabilities
    1,880       1,876  
   Income and other taxes payable
    441       468  
   Current portion of long-term debt (note 7)
    186       -  
   Future income taxes
    88       300  
   Liabilities of discontinued operations  (note 2)
    2       93  
      2,599       2,818  
                 
Deferred credits
    54       51  
Asset retirement obligations  (note 5)
    2,128       1,998  
Other long-term obligations (note 6)
    313       173  
Long-term debt  (note 7)
    4,143       3,961  
Future income taxes
    4,050       4,006  
Liabilities of discontinued operations  (note 2)
    28       118  
      10,716       10,307  
                 
Contingencies (note 14)
               
                 
Shareholders' equity
               
Common shares, no par value  (note 8)
               
  Authorized: unlimited
               
  Issued and outstanding:
               
   2009 - 1,015 million (December 2008 - 1,015 million)
    2,374       2,372  
Contributed surplus
    119       84  
Retained earnings
    9,369       8,966  
Accumulated other comprehensive loss
    (140 )     (272 )
      11,722       11,150  
Total liabilities and shareholders' equity
    25,037       24,275  
                 
See accompanying notes.
               
 

 
 
Talisman Energy Inc.
       
Consolidated Statements of Income
       
(unaudited)
       
                         
   
Three months ended
   
Six months ended
 
   
June 30
   
June 30
 
(millions of C$)
 
2009
   
2008
   
2009
   
2008
 
         
(restated -
         
(restated -
 
         
note 2)
         
note 2)
 
Revenue
                       
  Gross sales
    1,798       3,707       3,637       6,063  
  Hedging loss
    -       (14 )     -       (24 )
  Gross sales, net of hedging
    1,798       3,693       3,637       6,039  
  Less royalties
    221       708       521       1,069  
  Net sales
    1,577       2,985       3,116       4,970  
  Other
    26       37       60       59  
Total revenue
    1,603       3,022       3,176       5,029  
                                 
Expenses
                               
  Operating
    504       536       1,025       968  
  Transportation
    50       59       107       101  
  General and administrative
    86       75       167       139  
  Depreciation, depletion and amortization
    679       623       1,412       1,132  
  Dry hole
    51       70       295       134  
  Exploration
    58       115       126       170  
  Interest on long-term debt
    45       37       90       81  
  Stock-based compensation (note 9)
    117       270       150       260  
  Loss on held-for-trading financial instruments (note 10)
    438       530       365       598  
  Other, net (note 11)
    88       (6 )     103       (22 )
Total expenses
    2,116       2,309       3,840       3,561  
Income (loss) from continuing operations before taxes
    (513 )     713       (664 )     1,468  
Taxes
                               
  Current income tax
    175       502       307       735  
  Future income tax (recovery)
    (281 )     (115 )     (485 )     (56 )
  Petroleum revenue tax
    26       77       40       124  
      (80 )     464       (138 )     803  
Net income (loss) from continuing operations
    (433 )     249       (526 )     665  
Net income from discontinued operations (note 2)
    496       177       1,044       227  
Net income
    63       426       518       892  
                                 
                                 
Per common share (C$):
                               
  Net income (loss) from continuing operations
    (0.43 )     0.24       (0.52 )     0.65  
  Diluted net income (loss) from continuing operations
    (0.43 )     0.24       (0.52 )     0.64  
  Net income from discontinued operations
    0.49       0.17       1.03       0.22  
  Diluted net income from discontinued operations
    0.49       0.17       1.03       0.22  
  Net income
    0.06       0.42       0.51       0.88  
  Diluted net income
    0.06       0.41       0.51       0.86  
Average number of common shares outstanding (millions)
    1,015       1,019       1,015       1,019  
Diluted number of common shares outstanding (millions)
    1,015       1,043       1,015       1,040  
                                 
See accompanying notes.
                               
 
 

 
Talisman Energy Inc.
       
Consolidated Statements of Comprehensive Income
       
(unaudited)
       
                         
                         
 
 
Three months ended
June 30
 
Six months ended
June 30
 
(millions of C$)
 
2009
   
2008
   
2009
   
2008
 
                         
Net income
    63       426       518       892  
                                 
Foreign currency - translation of self-sustaining foreign operations1
    809       48       630       (103 )
Foreign currency - translation into reporting currency   
    (850 )     (65 )     (497 )     303  
Gains and losses on derivatives designated as cash flow hedges
                         
   Unrealized gains (losses) arising during the period2
    -       (3 )     (1 )     (3 )
   Realized losses recognized in net income3
    -       7       -       11  
      -       4       (1 )     8  
Other comprehensive income (loss)
    (41 )     (13 )     132       208  
Comprehensive income
    22       413       650       1,100  
1. Includes net investment hedging loss of $76 million and $56 million for the three and six months ended June 30, 2009 respectively (2008 - loss of $9 million and gain of $18 million respectively)
 
2. Three and six months ended June 30, 2009 net of tax of $0.5 million and nil respectively (2008 - ($6) million and ($6) million respectively)
 
3. Three and six months ended June 30, 2009 net of tax of nil (2008 - ($8) million and ($12) million respectively)
 
                                 
See accompanying notes.
                               
 
 
 
Talisman Energy Inc.
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
 
                                 
                                 
 
 
Three months ended
June 30
 
Six months ended
June 30
 
(millions of C$)
    2009       2008       2009       2008  
                                 
Common shares
                               
Balance at beginning of period
    2,373       2,437       2,372       2,437  
Issued on exercise of stock options (note 8)
    1       2       2       2  
Balance at end of period
    2,374       2,439       2,374       2,439  
                                 
Contributed Surplus
                               
Balance at beginning of period
    96       64       84       64  
Stock-based compensation (note 9)
    23       -       35       -  
Balance at end of period
    119       64       119       64  
                                 
Retained earnings
                               
Balance at beginning of period
    9,421       6,117       8,966       5,651  
Net income
    63       426       518       892  
Common share dividends
    (115 )     (102 )     (115 )     (102 )
Balance at end of period
    9,369       6,441       9,369       6,441  
                                 
Accumulated other comprehensive income (loss)
                               
Balance at beginning of period
    (99 )     32       (272 )     (189 )
Other comprehensive income (loss)
    (41 )     (13 )     132       208  
Balance at end of period
    (140 )     19       (140 )     19  
                                 
See accompanying notes.
                               
 

Talisman Energy Inc.
 
Consolidated Statements of Cash Flows
 
(unaudited)
 
                         
   
Three months ended
 
   
June 30
 
(millions of C$)
 
2009
   
2008
   
2009
   
2008
 
         
(restated -
         
(restated -
 
         
see note 2)
         
see note 2)
 
Operating
                       
Net income (loss) from continuing operations
    (433 )     249       (526 )     665  
Items not involving cash (note 13)
    1,239       1,211       2,550       1,885  
Exploration
    58       115       126       170  
      864       1,575       2,150       2,720  
Changes in non-cash working capital
    250       (153 )     27       (73 )
Cash provided by continuing operations
    1,114       1,422       2,177       2,647  
Cash provided by discontinued operations
    36       116       59       203  
Cash provided by operating activities
    1,150       1,538       2,236       2,850  
                                 
Investing
                               
Capital expenditures
                               
    Exploration, development and other
    (822 )     (978 )     (1,761 )     (1,944 )
    Property acquisitions
    (28 )     (278 )     (56 )     (375 )
Proceeds of resource property dispositions
    27       -       60       -  
Changes in non-cash working capital
    (100 )     136       (357 )     234  
Discontinued operations, net of capital expenditures
    1,268       248       1,850       192  
Cash provided by (used in) investing activities
    345       (872 )     (264 )     (1,893 )
                                 
Financing
                               
Long-term debt repaid
    (106 )     (1,197 )     (796 )     (2,364 )
Long-term debt issued
    879       492       1,249       1,030  
Common shares issued
    (1 )     -       -       -  
Common share dividends
    (115 )     (102 )     (115 )     (102 )
Deferred credits and other
    3       5       7       14  
Changes in non-cash working capital
    1       (3 )     2       (3 )
Cash provided by (used in) financing activities
    661       (805 )     347       (1,425 )
Effect of translation on foreign currency cash and cash equivalents
    (10 )     10       (24 )     20  
Net increase (decrease) in cash and cash equivalents
    2,146       (129 )     2,295       (448 )
Cash and cash equivalents net of bank indebtedness, beginning of period
    159       202       10       521  
Cash and cash equivalents net of bank indebtedness, end of period
    2,305       73       2,305       73  
                                 
Cash and cash equivalents (note 15)
    2,307       88       2,307       88  
Bank indebtedness
    2       15       2       15  
Cash and cash equivalents net of bank indebtedness, end of period
    2,305       73       2,305       73  
                                 
See accompanying notes.
                               
 
 
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


The Interim Consolidated Financial Statements of Talisman Energy Inc. (“Talisman” or “the Company”) have been prepared by management in accordance with Canadian generally accepted accounting principles.  Certain information and disclosures normally required to be included in notes to Annual Consolidated Financial Statements have been condensed or omitted.  The Interim Consolidated Financial Statements should be read in conjunction with the audited Annual Consolidated Financial Statements and the notes thereto in Talisman’s Annual Financial Report as at and for the year ended December 31, 2008.
 
1.  Significant Accounting Policies

The Interim Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the 2008 Annual Consolidated Financial Statements.

The following changes in accounting standards have been announced or are effective in 2009:

Goodwill and Intangible Assets

In February 2008, the Canadian Institute of Chartered Accountants (CICA) issued section 3064 relating to the recognition, measurement and disclosure of goodwill and intangible assets.  These recommendations are effective for Talisman’s 2009 reporting and have had no impact on the Company’s Consolidated Financial Statements.

Financial Instruments Disclosure

In June 2009, the CICA revised section 3862 to include a hierarchy concept in measuring financial instruments, a requirement to provide disclosure concerning the fair value measurements of assets and liabilities for each hierarchy level and amendments to the liquidity disclosure requirements.  The recommendations are effective for Talisman’s 2009 annual reporting.  However, since Talisman has previously used a hierarchy concept in measuring financial instruments and provided such disclosure in its annual consolidated financial statements, this amendment will have no impact on Talisman’s 2009 reporting.

Consolidated Financial Statements

In January 2009, the CICA issued section 1601 which establishes standards for the preparation of consolidated financial statements.  These recommendations are effective January 1, 2011 with early adoption permitted.  The adoption of section 1601 is not expected to have a material impact on Talisman’s reporting.

Business Combinations

In January 2009, the CICA issued section 1582 which establishes principles for the measurement of assets, liabilities and contingencies acquired at fair value, as well as recognizing acquisition-related and reorganization costs separately from the business combination within the consolidated statement of income.  These recommendations are effective for business combinations occurring after January 1, 2011, although early adoption is permitted.

International Financial Reporting Standards (IFRS)

In 2008, the CICA confirmed that publicly accountable enterprises will be required to adopt IFRS in place of Canadian GAAP for interim and annual reporting effective January 1, 2011.  At the present time, the impact of the adoption of IFRS on the Company’s Consolidated Financial Statements is not determinable.
 
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


2.  Discontinued Operations

The assets and liabilities related to discontinued operations have been reclassified as assets or liabilities of discontinued operations on the Consolidated Balance Sheets. Operating results related to these assets and liabilities have been included in net income from discontinued operations on the Consolidated Statements of Income. Comparative period balances have been restated.

   
Three months ended June 30
   
North America
   
UK
   
Scandinavia
   
Other
   
Total
   
2009
   
2008
   
2009
   
2008
    2009      2008    
2009
   
2008
    2009     2008
Revenue
                                                         
Gross sales
    32       107       -       21       -       33       26       54       58       215  
Royalties
    6       23       -       -       -       2       4       5       10       30  
Revenues, net of royalties
    26       84       -       21       -       31       22       49       48       185  
Expenses
                                                                               
Operating, marketing and general
    5       11       -       5       -       -       6       4       11       20  
Dry hole
    -       -       -       -       -       -       -       -       -       -  
Depreciation, depletion and amortization
    -       13       -       2       -       6       2       8       2       29  
Income from discontinued operations before income taxes
    21       60       -       14       -       25       14       37       35       136  
Taxes
    5       16       -       6       -       6       11       22       16       50  
Gain (loss) on disposition, net of tax
    376       119       -       (10 )     -       (18 )     101       -       477       91  
Net income (loss) from discontinued operations
    392       163       -       (2 )     -       1       104       15       496       177  
 

   
Six months ended June 30
 
   
North America
   
UK
   
Scandinavia
   
Other
   
Total
 
   
2009
   
2008
   
2009
   
2008
    2009      2008    
2009
   
2008
    2009 2008  
Revenue
                                                           
Gross sales
    77       194       -       43       -       46       44       85       121       368  
Royalties
    11       40       -       -       -       3       1       8       12       51  
Revenues, net of royalties
    66       154       -       43       -       43       43       77       109       317  
Expenses
                                                                               
Operating, marketing and general
    17       21       -       10       -       -       4       7       21       38  
Dry hole
    1       4       -       -       -       -       1       2       2       6  
Depreciation, depletion and amortization
    10       28       -       4       -       20       5       15       15       67  
Income from discontinued operations before income taxes
    38       101       -       29       -       23       33       53       71       206  
Taxes
    9       26       -       9       -       3       14       29       23       67  
Gain (loss) on disposition, net of tax
    433       119       471       15       (9 )     (46 )     101       -       996       88  
Net income (loss) from discontinued operations
    462       194       471       35       (9 )     (26 )     120       24       1,044       227  
 

 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)



   
As at June 30, 2009
 
   
North
America
   
UK
   
Scandinavia
   
Other
   
Total
 
Assets
                             
Current assets
    -       -       1       17       18  
Property, plant and equipment, net
    -       -       91       21       112  
Future income taxes
    -       -       -       3       3  
Goodwill
    -       -       21       4       25  
Total assets
    -       -       113       45       158  
Liabilities
                                       
Current liabilities
    -       -       1       1       2  
Asset retirement obligations
    -       -       1       1       2  
Future income taxes
    -       -       26       -       26  
Total liabilities
    -       -       28       2       30  
Net assets of discontinued operations
    -       -       85       43       128  


   
As at December 31, 2008
 
   
North
America
   
UK
   
Scandinavia
   
Other
   
Total1
 
Assets
                             
Current assets
    18       29       1       31       79  
Property, plant and equipment, net
    496       89       63       257       905  
Goodwill
    20       47       29       4       100  
Total assets
    534       165       93       292       1,084  
Liabilities
                                       
Current liabilities
    2       33       11       41       87  
Asset retirement obligations
    32       5       1       27       65  
Future income taxes
    -       10       25       24       59  
Total liabilities
    34       48       37       92       211  
Net assets of discontinued operations
    500       117       56       200       873  
 $136 million of long-term assets and $6 million of long-term liabilities have been presented as current assets and liabilities, respectively, of discontinued operations in the Consolidated Balance Sheets, since they related to a transaction that closed prior to reporting the December 31, 2008 financial position.

North America

In the second quarter of 2009, Talisman completed the sale of oil and gas producing assets in Southeast Saskatchewan for proceeds of $710 million, resulting in a gain of $321 million, net of tax of $109 million.

In the second quarter of 2009, Talisman completed the sale of certain of its midstream assets in Western Canada for proceeds of $297 million, resulting in a gain of $55 million, net of tax of $19 million.

In the first quarter of 2009, Talisman completed the sale of oil and gas producing assets in Western Canada for proceeds of $90 million, comprising cash and non-cash consideration, resulting in a gain of $57 million, net of tax of $19 million.

In the second quarter of 2008, Talisman sold oil and gas producing assets in Western Canada for proceeds of $247 million, resulting in a gain of $119 million, net of tax of $40 million.
 
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


UK

In the first quarter of 2009, Talisman completed the sale of its assets in the Netherlands for proceeds of $596 million, resulting in a gain of $471 million, net of tax of $nil.

In the second quarter of 2008, Talisman recorded an after-tax write-down of $10 million in respect of oil and gas properties that were sold in the fourth quarter of 2008.

In the first quarter of 2008, the Company recorded an after-tax closing adjustment of $25 million related to the sale of oil and gas properties in 2007.

Scandinavia

Talisman has entered into an agreement to sell a 10% share in the Yme field offshore development and three exploration licenses.  The Company recorded an after-tax write-down of $8 million in the fourth quarter of 2008 and an additional $9 million in the first quarter of 2009.  The sale is expected to be completed in the second half of 2009.

In the second quarter of 2008, Talisman completed the sale of its assets in Denmark for proceeds of $95 million, resulting in an after-tax writedown of these assets of $18 million.  A write-down of $28 million had previously been recorded in the first quarter of 2008.

Other

In the second quarter of 2009, Talisman completed the sale of assets in Trinidad and Tobago for proceeds of $278 million, resulting in a gain of $101 million, net of tax of nil.

Talisman is currently negotiating the sale of assets in Tunisia.  The operating results of these assets are included in the results of discontinued operations.

3.  Goodwill

Changes in the carrying amount of the Company’s goodwill are as follows:

  Six months ended   Year ended  
  June 30, 2009   December 31, 2008  
Opening balance
    1,260       1,302  
Foreign currency translation effect
    31       (42 )
Closing balance 1
    1,291       1,260  
1
At June 30, 2009 $25 million (December 31, 2008 - $100 million; January 1, 2008 - $116 million) has been reclassified to assets of discontinued operations.

Goodwill has no tax basis.
 
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


4.  Other Assets
 

  June 30, 2009   December 31, 2008  
Accrued pension asset
    32       32  
Fair value of derivative contracts (note 10)
    18       43  
Investments
    39       41  
Future income tax assets
    78       57  
Note receivable
    34       31  
Other
    19       30  
      220       234  

5.  Asset Retirement Obligations (ARO)
 

Changes in carrying amounts of the Company’s ARO associated with its property, plant and equipment are as follows:

  Six months ended   Year ended  
  June 30, 2009   December 31, 2008  
ARO liability, beginning of period
    2,028       1,908  
Liabilities incurred during period
    -       92  
Liabilities settled during period
    (16 )     (57 )
Accretion expense
    63       111  
Revisions in estimated future cash flows
    -       67  
Foreign currency translation
    83       (93 )
ARO liability, end of period1, 2
    2,158       2,028  
1
Included in June 30, 2009 and December 31, 2008 liabilities are $30 million and $30 million respectively of short-term reclamation costs recorded in accounts payable on the balance sheet for a net long-term ARO liability of $2,128 million and $1,998 million respectively.
2
At June 30, 2009, $2 million (December 31, 2008 - $65 million; January 1, 2008 - $116 million) has been reclassified to liabilities of discontinued operations.

 
6.  Other Long-Term Obligations
 

  June 30, 2009   December 31, 2008  
Accrued pension and other post-employment benefits liability
    51       60  
Fair value of derivative contracts (note 10)
    135       69  
Discounted obligations on capital leases1
    111       31  
Other
    16       13  
      313       173  
1
Of the total discounted liability of $133 million (December 31, 2008 - $37 million), $22 million (December 31, 2008 - $6 million) is included in accounts payable and accrued liabilities.


 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


7.  Long-Term Debt
 

   
June 30, 2009
   
December 31, 2008
 
Bank credit facilities
    -       576  
Tangguh project financing
    105       102  
Debentures and notes (unsecured):
               
US$ denominated (US$2,810 million, 2008 - US$1,920 million)
    3,267       2,350  
C$ denominated
    524       524  
UK£ denominated (UK£250 million)
    478       448  
Gross debt
    4,374       4,000  
Prepaid financing costs
    (45 )     (39 )
      4,329       3,961  
Less: current portion
    (186 )     -  
      4,143       3,961  
 
In March 2009, Talisman completed a private placement of US$50 million 8.25% Series A Senior Notes due March 11, 2014 and US$150 million 8.50% Series B Senior Notes due March 11, 2016.  Interest on both notes is payable quarterly.

In June 2009, Talisman completed a US$700 million offering of 7.75% notes due June 1, 2019.  Interest on the notes is payable semi-annually.

8.  Share Capital

Talisman’s authorized share capital consists of an unlimited number of common shares without nominal or par value and first and second preferred shares.  No preferred shares have been issued.

   
Six months ended
   
Year ended
 
Continuity of common shares
 
June 30, 2009
   
December 31, 2008
 
   
Shares
   
Amount
   
Shares
   
Amount
 
Balance, beginning of period
    1,014,708,249       2,372       1,018,590,255       2,437  
Issued on exercise of options
    104,765       2       179,994       3  
Purchased for PSU plan (note 9)
    -       -       (4,062,000 )     (68 )
Balance, end of period
    1,014,813,014       2,374       1,014,708,249       2,372  

Subsequent to June 30, 2009, no stock options were exercised for shares.

In October 2008, the Company renewed its normal course issuer bid (NCIB) with the Toronto Stock Exchange (TSX).  Pursuant to the NCIB, the Company may repurchase up to 50,938,512 of its common shares (representing 5% of the common shares outstanding at October 14, 2008) during the 12 month period commencing October 23, 2008 and ending October 22, 2009.  During the six months ended June 30, 2009, Talisman did not repurchase any common shares of the Company under the NCIB.


 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


9.  Stock-Based Compensation

Stock Option Plans

Talisman has stock option plans in place that allow for the granting of options to employees and directors. All options issued by the Company permit the holder to purchase one common share of the Company at the stated exercise price or to receive a cash payment equal to the appreciated value of the stock option.

   
Six months ended
   
Year ended
 
Continuity of stock options
 
June 30, 2009
   
December 31, 2008
 
   
Number of
   
Weighted-average
   
Number of
   
Weighted-average
 
   
Options
   
exercise price ($)
   
Options
   
exercise price ($)
 
Outstanding, beginning of period
    64,877,521       15.14       63,578,912       13.21  
Granted
    11,347,000       13.09       17,071,170       17.71  
Exercised for common shares
    (104,765 )     3.32       (179,994 )     9.00  
Exercised for cash payment
    (1,834,475 )     7.99       (13,880,528 )     9.08  
Forfeited/Expired
    (548,949 )     17.67       (1,712,039 )     19.11  
Outstanding, end of period
    73,736,332       15.00       64,877,521       15.14  
Exercisable, end of period
    35,774,615       12.85       30,135,489       10.80  

Subsequent to June 30, 2009, 20,815 stock options were exercised for cash, none were exercised for shares, none were granted and 181,220 were cancelled, with 73,534,297 outstanding at July 24, 2009.
 
Cash Unit Plans

In addition to the Company’s stock option plans, various subsidiaries of the Company issue stock appreciation rights under cash unit plans. Cash units are similar to stock options except that the holder does not have a right to purchase the underlying share of the Company.

   
Six months ended
   
Year ended
 
Continuity of cash units
 
June 30, 2009
   
December 31, 2008
 
   
Number of
   
Weighted-average
   
Number of
   
Weighted-average
 
   
Units
   
exercise price ($)
   
units
   
exercise price ($)
 
Outstanding, beginning of period
    9,723,082       16.52       9,970,493       15.14  
Granted
    1,364,230       13.17       2,184,940       18.06  
Exercised
    -       -       (1,984,466 )     10.85  
Cancelled/Forfeited
    (462,002 )     11.73       (447,885 )     19.43  
Outstanding, end of period
    10,625,310       16.28       9,723,082       16.52  
Exercisable, end of period
    5,090,148       14.68       3,495,861       11.40  

Subsequent to June 30, 2009, 7,350 cash units were exercised, none were granted and 8,100 were cancelled with 10,609,860 outstanding at July 24, 2009.

Performance Share Unit (PSU) Plans

In 2008, Talisman implemented a PSU plan pursuant to which 4,158,860 PSUs were granted.  Half of the PSUs vest on January 31, 2010. The remaining half will vest on the same date, subject to pre-determined performance measures being achieved.

To satisfy the Company’s obligation to deliver stock to settle various PSUs, the Company established a trust that purchased 4,062,000 shares of common stock on the open market for $68 million. These shares will be held in trust until the PSUs vest.  The Company is not exposed to fluctuations in the stock price in respect of the shares held in trust.

 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


For accounting purposes, the cost of the purchase of common stock held in trust has been accounted for as a reduction in outstanding shares of common stock and the trust has been consolidated in accordance with Accounting Guideline 15 since it meets the definition of a variable interest entity, and the Company is the primary beneficiary of the trust.

For the three months ended June 30, 2009 the Company recorded stock-based compensation expense of $12 million (2008 - $nil) relating to its 2008 PSU plan, with a corresponding increase in contributed surplus.

For the six months ended June 30, 2009 the Company recorded stock-based compensation expense of $24 million (2008 - $nil) relating to its 2008 PSU plan, with a corresponding increase in contributed surplus.

In April 2009, the Company implemented a new long-term PSU plan that allows for the granting of PSUs to employees, pursuant to which 4,988,024 PSUs were granted. PSUs vest three years after the grant date to varying degrees (0-150%), subject to pre-determined performance measures being achieved, and represent the right, subject to performance, to receive one share of the Company.

For the three and six months ended June 30, 2009, the Company recorded stock-based compensation expense of $5 million (2008 - $nil) relating to its 2009 PSU plan, with a corresponding increase in contributed surplus.

Deferred Share Unit (DSU) Plan

Talisman also issues DSUs to directors in lieu of cash compensation. Each DSU represents the right to receive a cash payment on retirement equal to the market value of the Company’s shares at the time of surrender. Dividends are credited as additional DSUs when paid. At June 30, 2009, there were 341,434 (December 31, 2008 – 316,390) units outstanding and the mark-to-market liability was $6 million (December 31, 2008 – $4 million). Expense related to the DSUs is recognized in general and administrative expense on the Consolidated Statements of Income.

Restricted Share Unit (RSU) Plan

Talisman has a RSU plan that grants RSUs to eligible employees. All RSUs issued by the Company permit the holder to receive a cash payment equal to the market value of the stock. Typically, RSUs granted under the plan are paid out three years after the grant date. At June 30, 2009, there were 340,434 (December 31, 2008 – 250,181) units outstanding (including dividend equivalent RSUs) and the mark-to-market liability was $2 million (December 31, 2008 – $0.5 million).

Stock-based compensation

For the three months ended June 30, 2009, the Company recorded stock-based compensation expense of $117 million (2008 - $270 million) relating to its stock option, cash unit, PSU and RSU plans.

 
For the six months ended June 30, 2009, the Company recorded stock-based compensation expense of $150 million (2008 - $260 million) relating to its stock option and cash unit, PSU and RSU plans.

Of the combined mark-to-market liability for stock option, cash unit, DSU and RSU plans of $198 million at June 30, 2009 (December 31, 2008 - $93 million), $194 million (December 31, 2008 – $93 million) is included in accounts payable and accrued liabilities and $4 million (December 31, 2008 – nil) is included in other long-term obligations.
 
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


10.  Financial Instruments and Risk Management

Talisman’s financial assets and liabilities at June 30, 2009 comprised cash and cash equivalents, accounts receivable, note receivable, investments, bank indebtedness, accounts payable and accrued liabilities, long-term debt, discounted obligations under capital leases and risk management assets and liabilities arising from the use of derivative financial instruments.

Fair value of Financial Assets and Liabilities

The fair value of debentures and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield for instruments having the same term and risk characteristics.  The fair value of Talisman’s long-term debt at June 30 was $4,303 million, while the carrying value was $4,374 million.  The fair values of all other financial assets and liabilities approximate their carrying values.

Risk Management Position

Derivative instrument
Balance sheet caption
June 30, 2009
December 31, 2008
Assets
     
Interest rate swaps
Accounts receivable
13
12
Interest rate swaps
Other assets
16
43
Commodity contracts
Accounts receivable
346
1,186
Commodity contracts
Other assets
2
-
Risk management assets
 
377
1,241
Liabilities
     
Cross currency swaps
Accounts payable and accrued liabilities
(2)
(3)
Cross currency swaps
Other long-term obligations
(5)
(22)
Commodity contracts
Accounts payable and accrued liabilities
(258)
(27)
Commodity contracts
Other long-term obligations
(130)
(47)
Risk management liabilities
(395)
(99)

For the three months ended June 30, 2009, the Company recorded a loss on held-for-trading financial instruments of $438 million (2008 – $530 million).

For the six months ended June 30, 2009, the Company recorded a loss on held-for-trading financial instruments of $365 million (2008 – $598 million).

Currency Risk

In respect of financial instruments existing at June 30, 2009, a 1% strengthening of the US$ against the other currencies to which the Company is exposed (Canadian dollar, British pound and Norwegian kroner), with all other variables assumed constant, would have resulted in an increase of $8 million in net income and an increase of $9 million in other comprehensive income for the three month period ended June 30, 2009.  A similar weakening of the US$ would have had the opposite impact.

Interest Rate Risk

In respect of financial instruments existing at June 30, 2009, a 1% increase in interest rates would have resulted in a $11 million decrease in net income, principally related to the fair value of the interest rate swap, for the three month period ended June 30, 2009.  A similar decrease in interest rates would have had the opposite effect.
 
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


Credit Risk

A significant proportion of Talisman’s accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks.  Substantially all of the Company's trade accounts receivable at June 30, 2009 were current. Talisman had no customers with individually significant balances outstanding at June 30, 2009. Concentration of credit risk is mitigated by having a broad domestic and international customer base.  The maximum credit exposure associated with accounts receivable is the carrying value.

Derivative counterparty exposure decreased significantly during the second quarter of 2009 as a result of settlements and increased oil prices.  The Company diversifies its derivative counterparty exposure.

Liquidity Risk

The majority of the Company's debt matures subsequent to 2010, with approximately $174 million maturing in the second half of 2009 and $12 million in 2010.

At June 30, 2009, the Company had not drawn against its available $2.8 billion of bank lines of credit, which are all fully committed through 2012.  These maturity dates may be extended from time to time by agreement between the Company and the respective lenders.  During 2009, the Company has diversified its maturities and enhanced liquidity through the private placement and notes offering described in note 7.

Commodity Price Risk

The Company had the following commodity price derivative contracts outstanding at June 30, 2009:
 
 
Fixed price swaps
Term
 
mcf/d
   
C$/mcf
   
Fair value
 
ICE index
Jul–Sep 2009
    23,452       6.48       2  
ICE index
Oct-Dec 2009
    20,638       8.22       (1 )
ICE index
Jan–Mar 2010
    20,638       8.22       (4 )
ICE index
Apr-Sep 2010
    20,638       6.76       (7 )
ICE index
Oct–Dec 2010
    17,824       7.95       (5 )
ICE index
Jan-Mar 2011
    17,824       7.95       (8 )
ICE index
Apr–Jun 2011
    16,886       7.25       (5 )
                        (28 )
 
 
           
Floor/ceiling
       
Two-way collars
Term
 
bbls/d
   
US$/bbl
   
Fair value
 
Dated Brent oil index
Jul-Dec 2009
    35,000       97.71/139.00       208  
WTI
Jul–Dec 2009
    41,000       54.51/68.86       (90 )
Dated Brent oil index
Jan–Dec 2010
    28,000       52.57/80.14       (80 )
WTI
Jan–Dec 2010
    22,000       50.20/60.87       (160 )
                        (122 )
                           
                         
             
Floor/ceiling
         
Two-way collars
Term
 
mcf/d
   
C$/mcf
   
Fair value
 
AECO index
Jul-Oct 2009
    9,482       6.33/6.76       3  
AECO index
Jan-Jun 2010
    94,820       5.82/7.17       7  
AECO index
Jan-Dec 2010
    47,410       5.78/7.39       4  
                        14  


Put options
Term
 
mcf/d
   
C$/mcf
   
Fair value
 
AECO index
Jul-Dec 2009
    222,827       6.33       96  
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)

 
In respect of outstanding financial instruments and assuming forward commodity prices in existence at June 30, 2009, an increase of US$1/bbl in the price of oil and $0.10/mcf in the price of natural gas would have reduced the net fair value of commodity derivatives thereby resulting in a decrease in net income of approximately $18 million for the three month period ended June 30, 2009.  A similar decrease in commodity prices would result in an increase in net income of approximately $21 million for the three month period ended June 30, 2009.

The Company may hedge a portion of its future production to protect cash flows to allow the Company to meet its strategic objectives.

Physical Commodity Contracts

The Company enters into fixed price sales contracts for the physical delivery of commodities. These contracts are in the regular course of business and are intended to be settled by delivering the product. As such, the fair value of these contracts is not recognized in the Consolidated Financial Statements and future revenues are recognized in net income as earned over the term of the contract.  The Company anticipates having sufficient future production to meet these fixed price sales contract commitments.

The Company had the following physical commodity contracts outstanding at June 30, 2009:

Contract
Term
Average volume
Average price or floor/ceiling
AECO natural gas swaps
Jul-Oct 2009
66,374 mcf/d
C$6.42/mcf
AECO natural gas collars
Jul-Oct 2009
104,302 mcf/d
C$6.34/6.99/mcf
AECO natural gas collars
Nov-Dec 2009
90,079 mcf/d
C$6.33/7.20/mcf
AECO natural gas swaps
Nov 2009-Dec 2010
14,223 mcf/d
C$6.33/mcf
AECO natural gas collars
Jan-Dec 2010
175,417 mcf/d
C$6.33/7.55/mcf
AECO natural gas swaps
Jul 2009-Dec 2011
3,671 mcf/d
C$3.41/mcf
       
11. Other Expenses

   
Three months
ended June 30
   
Six months
ended June 30
 
   
2009
   
2008
   
2009
   
2008
 
Foreign exchange (gains) losses
    104       (1 )     100       (19 )
Other
    (16 )     (5 )     3       (3 )
      88       (6 )     103       (22 )

12. Employee Benefits

The Company’s net pension benefit plan expense is as follows:

   
Three months
ended June 30
   
Six months
ended June 30
 
   
2009
   
2008
   
2009
   
2008
 
Current service cost - defined benefit
    4       6       8       10  
Current service cost - defined contribution
    5       3       8       6  
Interest cost
    4       4       9       7  
Expected return on plan assets
    (2 )     (5 )     (4 )     (9 )
Actuarial loss
    1       4       1       5  
Other
    -       (1 )     -       -  
      12       11       22       19  
 
 
 

 
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(tabular amounts in millions of Canadian dollars (“$”) except as noted)


13.  Selected Cash Flow Information

   
Three months
ended June 30
   
Six months
ended June 30
 
   
2009
   
2008
   
2009
   
2008
 
Items not involving cash:
                       
Depreciation, depletion and amortization
    679       623       1,412       1,132  
Dry hole
    51       70       295       134  
Net loss on asset disposals
    22       41       30       17  
Stock-based compensation expense
    104       81       132       62  
Future taxes and deferred petroleum revenue tax (recovery)
    (258 )     (45 )     (465 )     11  
Mark-to-market change of held-for-trading financial instruments
    629       461       1,140       529  
Other
    12       (20 )     6       -  
      1,239       1,211       2,550       1,885  
Interest paid
    32       22       83       76    
Income taxes paid
    14       257       383       413  

14.  Contingencies

From time to time, Talisman is the subject of litigation arising out of the Company’s operations. Damages claimed under such litigation, including the litigation discussed below may be material or may be indeterminate and the outcome of such litigation may materially impact the Company’s financial condition or results of operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defending itself against such litigation. These claims are not currently expected to have a material impact on the Company’s financial position.

On September 12, 2006, the United States District Court for the Southern District of New York (the Court) granted Talisman's Motion for Summary Judgment, dismissing the lawsuit brought against Talisman by the Presbyterian Church of Sudan and others under the Alien Tort Claims Act. The lawsuit alleged that the Company conspired with, or aided and abetted, the Government of Sudan to commit violations of international law in connection with the Company's now disposed of interest in oil operations in Sudan. The plaintiffs have twice attempted to certify the lawsuit as a class action. In March 2005 and in September 2005, the Court rejected the plaintiffs' effort to certify two different classes (or groups) of plaintiffs. The plaintiffs have appealed to the Second Circuit Court of Appeals, the Court's decision granting Talisman's Motion for Summary Judgment, its denial of class certification, and its refusal to consider the plaintiffs' proposed third amended complaint. A decision of the Second Circuit Court of Appeals is expected in 2009. Talisman believes the lawsuit is entirely without merit.

15.  Cash and cash equivalents

Of the cash and cash equivalents balance of $2.3 billion, arising largely from the disposition of assets described in note 2, $306 million has been invested in bank deposits and the remainder in highly rated marketable securities with maturities of less then three months.

                     16. Segmented Information                    
                                                             
                                                             
                                                             
 
 North America (1)
 
 UK
 Scandinavia
   
 Southeast Asia (2)
    Other (3)  
 Total
 
 Three months ended June 30
 Six months ended June 30
 Three months ended June 30
 Six months ended June 30
 Three months ended June 30
 Six months ended June 30
 Three months ended June 30
 Six months ended June 30
 Three months ended June 30
 Six months ended June 30
 Three months ended June 30
 Six months ended                   June 30
 (millions of Canadian $)
2009
2008
2009
2008
 
2009
2008
2009
2008
 
2009
2008
2009
2008
 
2009
2008
2009
2008
 
2009
2008
2009
2008
 
2009
2008
2009
2008
 
 Revenue
                                                           
 Gross sales
              485
      1,176
           1,025
        2,020
 
            592
         985
           1,121
      1,782
 
             212
         443
              454
         647
 
            430
           774
              819
    1,285
 
           79
            329
            218
       329
 
           1,798
            3,707
               3,637
                6,063
 
 Hedging
                    -
             -
                    -
               -
 
                 -
          (14)
                    -
         (24)
 
                   -
              -
                    -
             -
 
                  -
                -
                    -
           -
 
               -
                 -
                  -
           -
 
                    -
               (14)
                        -
                    (24)
 
 Royalties
                 55
         208
               140
           362
 
                2
             1
                   2
             5
 
                   -
              -
                    -
             -
 
            132
           320
              277
       523
 
           32
            179
            102
       179
 
              221
               708
                  521
                1,069
 
 Net sales
              430
         968
               885
        1,658
#
            590
         970
           1,119
      1,753
#
             212
         443
              454
         647
#
            298
           454
              542
       762
#
           47
            150
            116
       150
#
           1,577
            2,985
               3,116
                4,970
 
 Other
                 21
           30
                 47
             46
 
                4
             5
                 11
           10
 
                  1
              -
                   2
             1
 
                  -
                -
                    -
           -
 
               -
                2
                  -
           2
 
                26
                 37
                     60
                     59
 
 Total revenue
              451
         998
               932
        1,704
 
            594
         975
           1,130
      1,763
 
             213
         443
              456
         648
 
            298
           454
              542
       762
 
           47
            152
            116
       152
 
           1,603
            3,022
               3,176
                5,029
 
 Segmented expenses
                                                           
 Operating
              154
         158
               305
           282
 
            216
         227
              427
         443
 
               62
           80
              137
         137
 
              64
             56
              131
         90
 
              8
              15
              25
         16
 
              504
               536
               1,025
                   968
 
 Transportation
                 14
           18
                 26
             34
 
              11
           12
                 24
           19
 
               13
             9
                 25
           18
 
              10
             18
                 28
         26
 
              2
                2
                 4
           4
 
                50
                 59
                  107
                   101
 
 DD&A
              283
         269
               554
           523
 
            218
         167
              453
         310
 
               87
         110
              190
         174
 
              82
             63
              192
       111
 
              9
              14
              23
         14
 
              679
               623
               1,412
                1,132
 
 Dry hole
                    -
           46
               128
             66
 
               (1)
             5
                 30
           26
 
               35
           18
                 62
           42
 
                  -
               1
                 51
           -
 
           17
                 -
              24
           -
 
                51
                 70
                  295
                   134
 
 Exploration
                 12
           45
                 35
             68
 
                5
             7
                   7
           12
 
                  6
           17
                 12
           24
 
              15
             19
                 30
         26
 
           20
              27
              42
         40
 
                58
               115
                  126
                   170
 
 Other
               (12)
           (1)
               (11)
             (6)
 
            (11)
            (5)
                 (5)
              -
 
                  5
           (1)
                   5
           (2)
 
                 2
               1
                    -
           2
 
               -
               (1)
              12
         (5)
 
               (16)
                 (7)
                       1
                    (11)
 
 Total segmented expenses
              451
         535
           1,037
           967
 
            438
         413
              936
         810
 
             208
         233
              431
         393
 
            173
           158
              432
       255
 
           56
              57
            130
         69
 
           1,326
            1,396
               2,966
                2,494
 
 Segmented income (loss) before taxes
                    -
         463
             (105)
           737
 
            156
         562
              194
         953
 
                  5
         210
                 25
         255
 
            125
           296
              110
       507
 
            (9)
              95
             (14)
         83
 
              277
            1,626
                  210
                2,535
 
 Non-segmented expenses
                                                           
 General and administrative
                                                 
                86
                 75
                  167
                   139
 
 Interest
                                                 
                45
                 37
                     90
                     81
 
 Stock-based compensation
                                               
              117
               270
                  150
                   260
 
 Currency translation
                                                 
              104
                   1
                  102
                    (11)
 
 (Gain)/Loss on held-for-trading financial instruments
                                         
              438
               530
                  365
                   598
 
 Total non-segmented expenses
                                               
              790
               913
                  874
                1,067
 
 Income (loss) from continuing
                                                         
    operations before taxes
                                                 
            (513)
               713
                 (664)
                1,468
 
 Capital expenditures
                                                           
 Exploration
              103
         222
               308
           399
 
              44
           28
                 90
           78
 
               69
           53
              128
           90
 
              45
             92
              126
       177
 
           54
              35
            116
         52
 
              315
               430
                  768
                   796
 
 Development
              105
           65
               210
           285
 
            160
         186
              291
         310
 
             133
         160
              248
         301
 
              90
           106
              286
       192
 
           11
               (9)
              11
           1
 
              499
               508
               1,046
                1,089
 
 Midstream
                 (5)
           21
                 30
             31
 
                 -
              -
                    -
              -
 
                   -
              -
                    -
             -
 
                  -
                -
                    -
           -
 
               -
                 -
                  -
           -
 
                 (5)
                 21
                     30
                     31
 
 Exploration and development
              203
         308
               548
           715
 
            204
         214
              381
         388
 
             202
         213
              376
         391
 
            135
           198
              412
       369
 
           65
              26
            127
         53
 
              809
               959
               1,844
                1,916
 
 Property acquisitions
                                                 
                28
               278
                     56
                   389
 
 Proceeds on dispositions
                                                 
               (27)
                    -
                   (60)
                        -
 
 Other non-segmented
                                                 
                13
                 19
                     23
                     28
 
 Net capital expenditures (4)
                                               
              823
            1,256
               1,863
                2,333
 
 Property, plant and equipment
 
           8,558
        8,703
     
           4,988
      4,738
     
           1,926
      1,745
     
           2,982
    2,984
     
            880
       814
     
             19,334
              18,984
 
 Goodwill
   
               223
           224
     
              327
         306
     
              619
         602
     
              122
       129
     
                  -
           -
     
               1,291
                1,260
 
 Other
   
           2,826
           840
     
              414
         253
     
              174
         153
     
              334
       304
     
              97
       127
     
               3,845
                1,677
 
 Discontinued operations
   
                    -
           534
     
                    -
         165
     
              113
           93
     
                    -
           -
     
              45
       292
     
                  158
                1,084
 
 Segmented assets
   
         11,607
      10,301
     
           5,729
      5,462
     
           2,832
      2,593
     
           3,438
    3,417
     
         1,022
    1,233
     
             24,628
              23,005
 
 Non-segmented assets
                                                     
                  409
                1,270
 
 Total assets (5)
                                                     
             25,037
              24,275
 
                                                             
           
(1) North America
   
2009
2008
2009
2008
           
(2) Southeast Asia
 
2009
2008
2009
2008
 
           
 Canada
     
              426
         928
               873
      1,588
           
 Indonesia
     
               166
               258
                   301
                   460
 
           
 US
       
                25
           70
                 59
         116
           
 Malaysia
     
                 86
               130
                   147
                   226
 
           
Total revenue
   
              451
         998
               932
      1,704
           
 Vietnam
     
                 22
                    -
                     58
                     11
 
           
 Canada
         
            7,777
      7,903
           
 Australia
     
                 24
                 66
                     36
                     65
 
           
 US
           
               781
         800
           
Total revenue
   
               298
               454
                   542
                   762
 
           
Property, plant and equipment (5)
            8,558
      8,703
           
 Indonesia
         
                   984
                   990
 
                                         
 Malaysia
         
                1,274
                1,277
 
           
4 Excluding corporate acquisitions.
               
 Vietnam
         
                   471
                   470
 
           
5 Current year represents balances as at June 30, prior year represents balances as at December 31.
 Australia
         
                   253
                   247
 
                                         
Property, plant and equipment (5)
                2,982
                2,984
 
                                                             
                                         
(3) Other
     
2009
2008
2009
2008
 
                                         
 Algeria
     
                 53
               152
                   125
                   142
 
                                         
 Other
     
                 (6)
                    -
                      (9)
                     10
 
                                         
Total revenue
   
                 47
               152
                   116
                   152
 
                                         
 Algeria
         
                   221
                   249
 
                                         
 Other
         
                   659
                   565
 
                                         
Property, plant and equipment (5)
                   880
                   814